The Coalition Government was elected to crack down on spending and get the Crown accounts back into balance — just don’t call it austerity

Politicians and the media love emotionally charged words that add drama to otherwise dry policy debates.

Stock markets “crash” when they fall a few percent, health systems are “broken” when wait times are too long, a shortage of houses becomes a “crisis”, spending gets “slashed” and interest rates “hiked”. 

The most powerful, though, are technical terms that carry emotional weight, as seen in the fierce election debate about whether or not New Zealand was in a “recession”.

Today, the contentious word might be “austerity”. That was the accusation levelled against Finance Minister Nicola Willis after she announced a $1.1 billion spending reduction aimed at keeping the Crown on course for a 2029 surplus.

Green Party co-leader Chlöe Swarbrick said this was “ushering in a new era of austerity” and the Public Service Association said it was a “recipe for austerity, which history tells us does not work”.

But what exactly is austerity? And does history show it doesn’t work?

Dictionary dialectics

Austerity is most broadly defined as any set of policies aimed at reducing government budget deficits through some combination of spending cuts or tax increases.

When defined by its critics, austerity usually refers to sharp government spending cuts that stifle economic growth, exacerbate poverty, and lead to even more cuts in the future.

It brings to mind the United Kingdom’s sluggish recovery after the 2008 Global Financial Crisis and the painful economic struggles in Greece following its debt crisis.

Willis and her colleagues want to avoid this association and argue the Government’s fiscal approach is a garden-variety ‘fiscal consolidation’, rather than austerity. 

It’s a neutral, technical term that avoids the emotional baggage but essentially means the same thing. It’s not unlike the word ‘recession’, which evokes strong feelings despite having a somewhat softer definition.

(A stockbroker recently told me they advised clients to separate themselves from the macro story and ask, am I personally in a recession or not? That’s for another day, though.)

Grant Robertson once argued that the Crown should spend at least 30% of GDP and that anything less amounts to austerity. New Zealand remains well north of that threshold, with almost 34% forecast in 2025 and only falling to 31.5% in 2029.

Some argue high spending and ongoing deficits prove the Government isn’t doing austerity—but that’s incorrect. Austerity isn’t about having low spending, it's about cutting back from too-high levels.

Austerity has been made famous for its failures but has had some success as well. 

Good cop, bad cop 

In 1990, Canada proposed freezing federal payments, cutting business grants, capping military spending, and selling its state-owned oil company to reduce the budget deficit from US$25.3 billion to US$8.3 billion over five years.

The New York Times reported the story under the headline "Canada Presents Austerity Budget," and by 2000, the country had reduced its structural deficit by 6% of GDP and was running a surplus. 

This is often cited as an example of successful austerity. Canada’s economy continued to grow despite spending cuts and a looming debt crisis was avoided.

It's a stark contrast to Greece, which had austerity measures imposed on it by the IMF and European lenders as part of a debt-crisis bailout. The country’s economy almost collapsed and debt-to-GDP ratios worsened — the IMF itself later admitted austerity was a mistake.

So, why does austerity fiscal consolidation work in some cases, but fail in others? Most researchers say it comes down to policy design and economic context.

There are a few basic rules for protecting economic growth while reducing deficits. 

First, consolidation should happen when the local and global economy is strong or on an upswing. Output losses are larger during downturns because demand is already weak. 2025 might have been a good year for it, if it weren’t for Trump’s trade war.

Second, it’s better to rely on spending cuts than tax increases. International studies show tax hikes tend to have higher fiscal multipliers, meaning they drag more on economic growth. Multipliers vary, but the Treasury has found similar patterns in New Zealand.

Third, it should be gradual and avoid cutting critical services or productive investments that support long-term growth. The IMF now warns governments to resist the temptation to cut infrastructure, education, or health spending, as these can do lasting damage.

And finally, consolidation should be paired with supply-side reforms (and hopefully lower interest rates) that make it easier for the private sector to quickly pick up the economic slack left by government retreat.

Steady as she goes

Willis’ fiscal consolidation policies (we won’t call it austerity since it’s such a politically-loaded term) meets most of these orthodox criteria. 

Critics argue more money should be spent on critical services and infrastructure but it’s a matter of degree, not direction. Taxes will only rise by 1% of GDP over the forecast period.

The spending cuts are gradual: Core Crown expenses will fall less than 3% as a percentage of GDP over the next four or so years, and the OBEGALx deficit will reduce from 3% to zero. 

Ministers are also working on a wide range of pro-growth policy reforms, mostly in the form of deregulation. They may or may not benefit society but are generally good for growth

The real question is whether Willis is making a mistake by accelerating spending cuts in response to a weaker outlook, risking a repeat of failed austerity where cuts drive GDP lower in a vicious cycle.

She had previously suggested the Coalition would stick to its fiscal path and not overreact to forecast changes either way. Labour ran procyclical policy by increasing spending with extra revenue; National now risks repeating this mistake in reverse.

The broad strokes of Willis’ fiscal policy are roughly what experts recommend to reduce a deficit, but whether she is moving too soon or too fast remains up for debate.